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Six years ago, 1% of the world's population had smartphones. This year, the number will hit 27%. It will continue rising for years to come, but the growth rate in sales is about to start slipping, according to a recent analysis by JPMorgan. This year, shipments will rise 37%. Next year: 17%.

Wall Street sees Apple's operating margin sliding to 27% over the next four years, from 35% last year. One reason: To fuel growth, the company might have to offer lower-price phones.
Stuart Goldenberg for Barron's

HIGH-END PHONES WILL face two headwinds in coming years. The first is that the saturation level is greatest in markets that can best afford them. It will hit 72% in the U.S. this year, reckons JPMorgan. As manufacturers find fewer first-time smartphone buyers, they will have to rely more on upgrades from existing customers. The second headwind is that the number of pressing reasons for upgrades may dwindle. Displays and cameras already have reached resolutions that satisfy even finicky users. LTE, the high-speed data technology, is driving plenty of upgrades now, but it's now fast enough for video chats and movie streaming, so the next speed jump might not be as necessary. Near-field communications chips may one day allow phones to replace credit cards, but not without much more effort on the part of merchants and payment processors.

That leaves the possibility that smartphone makers will have to increasingly appeal on price as much as on features, which in turn could drive down profit margins. Wall Street predicts that Apple's operating margin will slide to 27% over the next four years, from 35% last year. Long-term investors should do fine. The cash-stuffed company trades at just 10 times projected earnings for its current fiscal year, which runs through September. It has a dividend yield of 2.3% and can afford to double its payment. But in the short term, Apple may face a choice between offering lower-price models to fuel growth or sticking with the high end to preserve margins. "We think the earnings estimates will have to come down," warns William Power, a wireless analyst at Robert W. Baird.

Samsung, at eight times this year's earnings forecast, makes much more than smartphones. But two-thirds of its operating profits come from mobile devices, and its vast manufacturing reach means it makes more of its phone innards in-house than Apple. "It can manage costs proactively," says George Greig, an investment strategist at William Blair. It also has a mix of exposure; it makes high-end phones, but also midrange ones. Growth prospects in the midrange are better, especially in emerging markets, says Power. That means that while Samsung's margins are only about half those of Apple, they also may be less at risk in the near term.

AMONG CHIP MAKERS, Qualcomm sells baseband chips and processors, including lucrative ones that power the latest smartphones, while Broadcom specializes in less-expensive connectivity chips and components for midrange phones. One threat to chip producers is that handset companies might seek cost savings by making more components in-house. If that happens, the costlier chips made by Qualcomm are a bigger target. Broadcom's reputation for aggressive pricing, meanwhile, should help it gain market share as handset makers become more cost-conscious.

Verizon and AT&T have steady cash flows and big dividend yields. But they look fully priced, Verizon at 16 times this year's earnings estimates and AT&T at 14 times. Look instead to Vodafone, which sells for 10 times earnings. It has exposure to Europe, whose economy is recovering more slowly than that of the U.S., but whose smartphone penetration is barely half as high. And it has a 45% stake in Verizon Wireless. The market places no value on that stake, wrote hedge-fund manager David Einhorn in his letter to shareholders last month, and "it wouldn't surprise us if Verizon decided to buy all of VOD to gain full ownership of Verizon Wireless."